Joe Eqcome

Six Additional Comments on Cornerstone Progressive Return Fund

You seem to be comparing apples with oranges.

You can’t compare a price index, such as the S&P 500, with the NAV of CFP. If you wanted to compare the two you should use the book value of the S&P 500 as a comparable. Unless you’re saying that CFP’s NAV should represent the true stock value of CFP. If that’s the case, thank you for making my point.

However, let’s compare apples with apples. Using the peak of the previous stock market cycle (Oct ’07) as a reference point—which just happens to be the month-end after CFP was launched—the Eqcome CEF index average NAV declined 30.1% from the stock market peak to Nov ’09. The decline in CFP’s NAV for the same time period was 59%.

This was twice the decline of the industry. I could say from this metric that CFP’s investment management skills were lagging the industry. So much for relative performance!

However, CFP is selling at a 50% premium to its NAV while the CEF market segment is selling at a 5.7% discount. Do you think that CFP’s premium is a function of their management prowess? CFP did twice as bad a job of preserving value as other CEF managements!

The premium is mostly a function of a return of capital distribution being calculated as a return on investment by unsophisticated investors.

This whole “sales point” about CFP being able to offset future gains with net loss carry forwards is the most ingenuous argument that has been advanced.

For those of you who just arrived on planet Earth, all CEFs experienced losses during this time period and they also have net loss carry forwards to offset gains. If fact, they’re selling at a discount to NAV.

Since two-third of CFP’s portfolio is other CEFs, why pay a premium for net loss carry forwards that I can buy for 1/3 less than what I pay for CFP.

With regards to CFP outperforming the S&P 500 going forward, there are two issues: 1) the investment prowess of the management--which as previously demonstrated has not been impressive; 2) the ability of CFP to continue to sell at an extraordinary multiple of 50%.

If CFP premium gravitates to its historical average, it will have to beat the S&P returns by 50%.

My concern is not a small short position I have in the stock, just to keep my interest, but for all the independent retail investors who will experience substantial capital loss on their investments in CFP if they invest at the current price.

As it goes for being impolite, I am actually a very polite person. But I take my money and other peoples’ money very seriously. I believe we all have an obligation to do the minimum of due diligence as other investors may take what we say here as building blocks for investment decision making.

I apologize if I seemed shrill.

Lastly, I think George just got a “bad patch of brew” and his prospects for his speedy recovery are excellent.

On Dec 17 02:19 PM Student of CEF's wrote:

> One should deal with the facts. CFP was initiated with a NAV of $15.00
> on September 12, 2007 when the S&P Index was 1483.95. Since then
> CFP gone ex-dividend for 27 payments of $0.205 or $5.535 representing
> a loss in NAV of 22.5% through 12/11/09. During this same period
> the S&P index has declined to 1106.41 or 25.4% .
>
> To assume that the past 2 1/4 years is typical of the performance
> one should expect in the future does a disservice to any investment
> vehicle. CFP has embarked this year on a program of exploiting the
> inefficiencies in the Closed-end Fund Market. If they do it well,
> they will out-perform the S&P in the future. The degree of future
> out-performance, if any, will determine how much of a premium or
> discount they deserve. It is not at all beyond reason to believe
> that they may recover all or more of the $3.38 lost to NAV in the
> past. To the extent they do so, all the gains will be tax free.<br/>
>
> It is unduly harsh to expect that there will be no appreciation in
> their portfolio going forward, and that all the distributions will
> be 100% return of capital. Indeed, they have had substantial capital
> appreciation in their portfolio this year (which is shielded from
> any tax consequences).
>
> People who are short have an agenda. They will only present one side
> of the story. But there is no need to be nasty or impolite.

Six Additional Comments on Cornerstone Progressive Return Fund

First of all, I congratulate you for the courage of correcting your inaccuracies publicly.

However I am very disappointed regarding the sloppy research. Your first three points above are gross inaccuracies and the last two points are concessions to Ron Olin.

Your point “6” is essentially mis-information. In order to use tax losses you must generate profits to offset the tax losses. CFP has not made any money for its shareholders since inception and it is charging a 1.23%.

Based on the rate of ROC distribution they will have a zero NAV in 2.4 years and be out of business. Not enough time to recapture $47 million in realized and unrealized losses, or approximately $5.00 per share. Particularly considering since inception CFP has earned a total of $.27 per share in NII. And, a return of capital is a return of capital!

George, not only is this discouraging on the basis of research, it now sounds like you’re now “pimping” for Ron Olin.

Closed-End Funds: A Legalized Ponzi Scheme?

There are two concepts here that are somewhat related.

When CFP distributes a return of capital to you, its NAV is reduced by a similar amount. So, in round numbers, if CFP's NAV at the beginning of the year is $6.00 per share and it distributes $2.50 per share return of capital during the year, its NAV is reduced by a similar amount. The NAV at year end is now 3.50 per share $6.00 - $2.50).

Now, let's say you're unlucky investor who buys this stock at a 50% premium, or $9.00 per share. Your accountant will reduce your cost basis based on your purchase price to $6.50 ($9.00 - $2.50) at the end of the year. So both the NAV and your cost basis are adjusted by a similar amount.

Assuming that CFP continues to distribute $2.50 annually then it will take 2.4 years for the NAV to go to zero.

At the end of 2.4 years you will have reduced your purchase price of $9.00 per share less the cumulative distribution of $6.00 leaving you with a cost basis of $3.00 per share while the NAV is zero.

So the difference between your cost basis (3.00 per share) and the NAV is essentially "air". You've paid $9.00 for $6.00 for a series of return-of-capital distributions. Try getting another investors to buy your stock for $3.00 at the end of 2.4 years.

All this time the management of CFP is dribbling out their holdings at this 50% premium.

This stock investment is simply a transfer of wealth from uninformed retail investors to wealth money managers. This is a timeless story.

On Dec 16 07:08 PM geno wrote:

> if there is roc instead of true yield, why doesn't my cost basis
> change like an MLP?

Closed-End Funds: A Legalized Ponzi Scheme?

No, I don't think there is any active manipulation of the share price. I would characterize it more as passive manipulation. It is management’s exploitation of what I described in the article as the "distribution information gap".

CEFs are paying out a return-of-capital distribution and investors are valuing--at least a part of that distribution--as if it were a distribution based on a return-on-investment. CEF management's understand this dynamic.

Yes, Virginia, a 27% yield on your investment is likely too good to be true.

The difference between CFP and other CEFs that you mentioned is one of degree.

On Dec 16 01:52 PM User 357757 wrote:

> Is there any difference between CFP and CRF or Pimco funds PGP and
> PHK? Who is paying for these shares to keep them so high above their
> NAVs? Is there manipulation in your opinion?

Closed-End Funds: A Legalized Ponzi Scheme?

If one were to conclude, as other seem to agree, that there are elements of "dot.com" to these CEFs valuations, then there will be a time--just like the dot.com’s, where selling these stocks short will reap huge rewards.

All the names that many have contributed in their comments that are look-alikes with regards to faux distributions are candidates for that list.

However, unlike the dot.com’s, which didn't make distributions, there is a holding cost to the strategy. So, timing is a critical element. And as someone has previously remarked, the market can remain irrational longer than investors can remain solvent.

A change in the Fed policy towards higher interest rates will likely be a catalyst. It will signal a resumption of economic growth and higher alternative interest rates. CEFs will be squeezed as their borrowing cost rise and lower yielding investments that they will have been adding to their portfolios.

The current betting is that it’s probably March of next year at the earliest.

Now is the time to expose these situations and stalk the group.

Get your list ready. But be patient.

On Dec 16 04:28 PM User 357757 wrote:

> Have you looked at the Alpine funds (AOD and AGD) or Pimco funds
> (PGP and PHK)? They do the same thing as CFP. Amazing how these funds
> keep going higher.

Closed-End Funds: A Legalized Ponzi Scheme?

Yes. At the current rate CFP is distributing their capital, I think it is about 30 months (2.5 years) it will have exhausted their NAV. At that point the share price and NAV are likely to converge at zero.

On Dec 16 11:22 AM Fred Weidling wrote:

> Dumb question: if a CEF isn't continuously selling new shares (and
> I didn't think they do that), won't return-of-capital distributions
> take the NAV to zero?

Closed-End Funds: A Legalized Ponzi Scheme?

Yes, Madoff was reporting false numbers and CFP isn’t. And I clearly make that distinction in highlighting the fraud aspect of Madoff’s operation. Additionally, I make it very clear that what CFP is doing is not illegal.

More importantly, the point is that Madoff didn’t have to report fraudulent numbers if he used a closed end fund vehicle. He could have paid out investors' own money and the investors, themselves, would have created the fictitious valuations by mistakenly valuing a return-of-capital distribution as a return-on-investment and pushing the stock price to a 45% premium to NAV.

While elements of this analogy are “tongue and cheek”, nonetheless, the end result is the same. Investors will lose their capital. They will just be doing it by their own hands as opposed to being lied to. And yes, it will take longer than one would think for this reality to overtake the stock valuation.

My issue is the regulatory infrastructure that allows this to happen. CEF should not pay out a return of capital without a special distribution requirement with a separate ex-date and pay-date that clearly separates distributions from investment activities from a return your own money.

Let me add that I am not an expert of the regulations regarding CEF distribution requirements. And if I'm incorrect on the facts, then I look forward to someone with greater knowledge in this area to enlighten me. However common sense would lead you to a similar conclusion.

However, from a purely investment point of view, It would appear to me this stock would be incredibly vulnerable to a “bear raid” as most of the ownership is concentrated and there is nothing but “air” between the current stock price and the NAV.

The current holders would have to defend the stock by continuing to support the price by buying small lots. If they have enough capital they will continue to do so as it is in their benefit to keep the stock price high so they can dribble out shares at this premium.

So, this is really an opportunity for institutional investors to test just how deep the pockets of the current owners of CFP are?


On Dec 16 09:51 AM George Spritzer wrote:

> Good article, Joe. But I think it is a little harsh to compare CFP
> to Madoff. CFP is reporting valid audited NAV performance numbers.
> Madoff fabricated his performance numbers which is outright fraud.
>
>
> I think CFP is more comparable to the dot-com mania in 1999 and early
> 2000.

Municipal CEFs: Yield Now or Yield Later

What is the incremental cost per share of replacing the ARPS with MTPs? Shouldn't there be an immediate impact by virtue of ARPS current default rate be so low?

CEFs Weekly Review: Utility Funds Get Boost

I think management has already accomplish stacking the board by having a staggard board approved earlier this year.

Clearly, BIF has hurt shareholders by not reinstating the dividend sooner. This has kept the price of the shares lower as they've continued to accumulate their position.

I look forward to how they will handle a reinstatement of the dividend.


On Dec 13 10:31 AM GKurinsky wrote:

> Hey Joe, other than altering the election of directors to make it
> harder to approved changes to the funds management, what else can
> the Horesji group do to hurt current shareholders ?
>
> Can they cut a deal with Doliver that would not give the same treatment
> to other shareholders ?

Cornerstone Progressive Return Fund: Clever IPO Distribution Strategy

Great article!

I'll be following up your article with another one later this week on CFP. I look forward to comparing notes afterwards.

PHK’s Semi-Annual Review: Distribution Reduction Long Overdue

Yes, CEF prices are up about 40% year-to-date after suffering two consecutive years of decline.

While some of the CEFs have high yields, many of those yields are suspect.

One of the issues the CEF market segment needs to overcome is greater transparency of distributions. CEFs have a regulatory infrastructure that makes “hiding the pea” with regards to sources of distributions a “cover” for CEF managements’ to effectively manipulate share prices.

This lack of ready transparency can allow a CEF to distribute a recurring return-of-capital distribution to investors--that investors perceive as a return-on-investment and not a return-of-investment--... effectively drive the share price higher and the NAV lower. This effectively creates the enormous premiums we’re seeing in some of the CEFs share price that will eventually be “pricked”.

This amounts to a legalized Ponzi scheme. The only difference in a CEF paying out a substantial return-of-capital portion back to its investors and Bernie Madoff’s investment scam is one of disclosure.

As long as a CEF get a waiver to distribute return of capital on a periodic basis from the SEC, all it has to do is report that amount to its shareholders, who, by the way, are typically retired and throw away anything with small print. This disclosure is not available through EDGAR.

The current disclosure of sources of distribution is currently not investor friendly and gives pause to potential investors when considering this market segment.


On Dec 11 01:57 PM Innocex wrote:

> While I have noticed a big increase in CEF prices, I am surprised
> the share prices aren't higher considering how difficult it is to
> get yield anywhere else.... do you think people are worried about
> a double dip recession and avoid buying corp debt?

PHK’s Semi-Annual Review: Distribution Reduction Long Overdue

I agree with all your observations including the better quote.


On Dec 11 01:06 PM frogmatic wrote:

> I think the more relevant quote is the one about the market staying
> irrational longer than you can stay solvent...
>
> I wonder if your prediction that a dividend cut is likely in 2010
> will come to pass. These high-distribution CEFs seem to live and
> die by maintaining a steady dividend -- there are several CEFs that
> suspended divs and are now trading at hefty discounts to NAV as a
> consequence -- not to mention that Bill Gross' (and Pimco's) reputation
> is on the line here. Frankly, it wouldn't surprise me to see them
> continue to sell the seed corn and maintain a $1.46 annual distribution
> just for PR purposes, and/or on speculation of further bubbliciousness
> in the markets bailing them out of a shrinking NAV.
>
> Also, would like to see a similar analysis run for PGP, which is
> even more overvalued than PHK and has no ARPs to juice returns.

CEF Weekly Review: Real Estate Surges

Thanks for the "heads up".

Almost-Cheery Thoughts on the 2010 Stock Market

"Almost" is the key to the phrase "almost cheery" in the title of the article.

Obviously, your sense of sarcasm and irony needs exercising.

Happy holidays.


On Nov 25 06:11 AM chris coonan wrote:

> Sitting next to the exit, as the author notes, is not exactly what
> I would call a bright, cheery assessment of the 2010 market.

Closed-End Funds: Hugging the Flat line

Thanks. I'll check it out.


On Nov 16 07:17 PM starvin sargent wrote:

> Hey Joe, What is behind the 4th quarter lagging performance and the
> late Dec bounce that has happened in recent years in CEF's? The only
> explanation I can find is fund managers i.e. smart money EOY selling
> / buying. It is almost a dance to shake down the prices and re buy
> or something odd. Please also consider a special article on buy write
> CEF's IRR and GGN seem like good performers, especially the volatility
> of IRR verses the underlying stocks volatility